THE IMPACT OF RECENT MARKET EVENTS ON MEMBERS’ RETIREMENT SAVINGS
By Sherwin Pillay, Principal Investment Consultant
The purpose of this communication is to explain to retirement fund members the impact that the recent market events have had on their retirement savings. We understand members may be worried about a recent sharp decline in the value of their retirement savings after seeing a rapid and an extreme sell-off of assets around the world, the fastest since the 1930s. This has led to shocking returns over the last three months, which will be discussed shortly. We will also discuss why this is not the time to panic or make any irrational decisions.
What has caused markets to crash?
Stock markets around the world have crashed from mid-February and into March because of fear around the impact of the spread of the coronavirus (COVID-19) on the global economy. In fact, March 2020 will stand out as one of the most brutal months in the history of global financial markets.
Locally, we have already had a struggling economy, a financial recession, a recent downgrade of South Africa’s credit rating to junk status, as well as ongoing challenges faced by the state-owned enterprises to deal with. Now the widespread uncertainty of the COVID-19 pandemic has negatively affected equity markets, emerging market currencies and our bond market. This has had a direct negative impact on the retirement and personal savings of many South Africans. Out of fear and panic, investors have largely sold off assets across the board in favour of holding cash during this time of uncertainty and fear.
What effect has COVID-19 had on investment returns?
The graph below shows the sharp sell-off on the JSE, the local market: over the period from 18 January 2020 to 20 March 2020 the JSE fell over 35%. It is worth noting that the JSE has staged a quiet recovery since 20 March 2020, regaining about a third of the losses suffered, as stock markets around the world responded to the stimulus measures implemented by a number of countries to support the economic downturn.
As can be seen from the table above, there has been a broad-based sell-off across a number of asset classes. No asset class was spared, with the exception of cash and global bonds. The recent sell-off in financial markets would have led to a sudden decrease in your retirement savings, which also makes longer-term returns look bad.
At the same time, we saw a fall in global demand, and supply shocks as most economies reduced trade and businesses shut down production, in an attempt to contain the virus. The shutdowns resulted in a reduced demand for oil. An emergency OPEC meeting was held, with the intention to agree on reduced oil output. Unfortunately, Saudi Arabia and Russia could not reach agreement, resulting in an all-out price war, with both countries increasing rather than reducing oil production. In the end, we saw the oil price plummet from US$50 to around US$30 a barrel, because of increased oversupply in a market where demand was already low. The falling oil price, having collapsed by about 60% this year alone, makes it difficult for some oil producers in the world to service debt and interest repayments. For example, the Sasol share price has lost almost 95% of its value since April last year.
What are governments around the world doing?
Many countries have closed their borders and gone into lockdown, restricting activities to essential movement in an effort to contain COVID-19. Governments across the world are also trying to support their economies by various fiscal (spending levels and taxes) and monitory (money supply and interest rate cuts) policies. The US Federal Reserve cut interest rates aggressively to a range of 0%-0.25% and the US government also announced a $2 trillion package to provide additional liquidity and support financial markets.
In South Africa, President Ramaphosa declared a national state of disaster on 15 March 2020, also announcing measures to contain the spread of COVID-19. The South African Reserve Bank reduced interest rates by 1% in order to stimulate domestic economic growth and ease consumers’ financial stress by reducing credit payments. There are also a number of initiatives and measures put in place with funding from Government and the private sector. For example, a solidarity fund has been set up to assist the fight against COVID-19. Notably, Government provided R150 million in seed capital with Sanlam and the Motsepe Foundation, the Rupert and Oppenheimer families each donating R1 billion to the cause. Naspers has also since donated R1,5bn to assist in the fight against the virus.
What should members do in the current situation?
Although we are currently experiencing a very painful and tragic crisis, a humanitarian health crisis, this is not the first pandemic the world has been through and neither will it be the last. At some point we will come through to the other side of the pandemic. It is also important to understand that the sharp sell-off in markets we have witnessed since mid-February 2020 has not been based on investment fundamentals, but rather on fear and panic about the uncertainty of COVID-19 and the long-term impact it will have on economies and business. In uncertain times like these, investors typically panic out of fear and sell their assets such as equities and bonds causing massive losses.
The above graphs illustrate this well. Investors typically don’t earn the market return due to their emotional behaviour of ‘selling low out of fear and buying high because of greed’, or chasing past performance. Members also quite often make short-term decisions based on emotions.
Concluding comments
Members should be focusing on the long-term goals. There is always the temptation to change strategies and switch out of an underperforming portfolio into cash. However, history has shown that members who attempt to time the market by moving into low-risk investments when markets are falling, destroy value in the long run. Members further away from retirement will have time on their side and should not panic. By staying invested in the markets, they will have the opportunity to make back the returns once markets recover. For members who are closer to retirement, even if your pot of money has lost value and you see negative returns, the cost of purchasing a life annuity (especially an inflation-linked annuity) from an insurance company has dropped significantly and this will further cushion the blow of the fall experienced in financial markets.
The graph below demonstrates this point by depicting the value of R100 over the long term, invested in an average accumulation (growth) portfolio and an average conservative portfolio, both of which outperformed cash and their CPI objectives over the long term.
Remaining invested is the best thing an investor can do to meet their investment goal. Past market crashes have shown that the ultimate winners of any market crash are those who stick to their long-term investment goal and remain invested through the crash. Switching out investments (or changing investment strategies) often yields the most inefficient outcomes, as investors would be locking in their losses.
The current economic crisis is uncertain, and no one knows the full extent of how the global COVID-19 pandemic will affect financial markets or the time required for markets to recover from this slowdown. What is certain is that the markets are likely to be volatile, moving up and down in extremes in the short term. However, they will recover when there is more certainty that the COVID-19 epidemic has been overcome.
The most important action to take right now is to make a conscious decision not to panic, and to stick to your long-term investment plan.